Abu Dhabi's Sovereign Fund Solidly Behind Mubadala Aerospace

Homaid Al Shemmari, chief executive of Mubadala Aerospace, wants the company to assume a lead role in research and development.

Abu Dhabi is determined to succeed in aerospace, but not at all costs. Mubadala, the emirate’s $45 billion sovereign wealth fund, set up an aerospace division in 2006. The plan is for it to break even by 2013, but some latitude is possible on this goal, if the group secures the right partnership opportunities to support its plan to spend around $1 billion building another new facility here in the United Arab Emirates.

“Our shareholders have been very specific. We do not have an open checkbook, we have to be very smart because aerospace is one of several investment options for them,” explained Mubadala Aerospace chief executive Homaid Al Shemmari. “Abu Dhabi is blessed with wealth but this alone is not a sustainable model for our company.”

Aerospace has been identified a key industry in Abu Dhabi’s bid to diversify its economy away from complete dependence on its still vast income from oil. In theory, the emirate has another couple of generations in which to achieve this goal, but Mubadala Aerospace has not wasted time identifying aerospace sectors in which it can be competitive as a Tier One player focusing instead on composite aerostructures manufacturing, maintenance, repair and overhaul (MRO) in both civil and military markets and aviation training.

For just over a year, the Strata factory at Al Ain, which opened in May 2010, has been producing complete shipsets of flap track fairings for the Airbus A330/340 airliners. The company wants to increase its roll in Airbus programs and is already set to be the sole flap track supplier for the A380, as well as to partner with other airframers, including Boeing (see 573Strata on page ??).

“We want to take Strata up to another level of manufacturing that will include more engineering work,” Al Shemmari told AIN. “This will mean adding extra capacity and automating processes such as [composite] layups and, unless we can automate, we will have to send work packages to other companies. So instead of having 30 people [doing a specific task], we will have two machines and ten people doing it.”

To ascend the aerospace food chain, Al Shemmari knows that his team needs to seriously strengthen its game in research and engineering development capability. Further acquisitions will likely be one path to this goal, but much of the talent will be home grown as Mubadala plots Abu Dhabi’s future in the industry with a timeline of at least two or three decades.

A more immediate target for the group is to be ready to play a part in the development of the next generation of narrowbody airliners. Mubadala hopes that by the middle of 2012 it will have closed an acquisition that would put it in a prime spot to move into one or both of the respective Airbus and Boeing programs. “Then all the building blocks will be in place for us to become a Tier One risk-sharing partner around 2014 to 2016,” said Al Shemmari. “We want to be ready to take the lead in research and development and to be subcontracting work to others.”

Meanwhile, Mubadala is also close to announcing a tie-up between universities in the U.S. and the UAE to jointly develop a new degree in aerospace engineering for UAE students. For the time being, the company is mainly recruiting graduates in mechanical and electrical engineering.

In the MRO sector, Mubadala has been looking to build its capabilities through buying expertise that can be spread throughout the business and by establishing strategic partnerships with manufacturers wanting product support infrastructure in the Middle East. The acquisition of Swiss-based MRO group SR Technics brought a wealth of what Al Shemmari referred to as “human capital.” This skills base is being used to develop capabilities of its Abu Dhabi Aircraft Technologies (ADAT) subsidiary, which is active in civil aircraft support, with Abu Dhabi’s Etihad Airways being one of its newest clients.

Last year ADAT forged an alliance with General Electric and Engine Alliance, which will see it supporting the new GEnx and GP7200 turbofans. In July of this year, Hamilton Sundstrand approved the company to support all its various systems for the Boeing 787 Dreamliner.

Despite the high Swiss cost base of SR Technics, Mubadala believes the business can still compete in the global market and, in tandem with ADAT the group’s MRO interests, can be the third largest player in civil markets behind Lufthansa Technik and Air France KLM. As part of the skills development plan, around 50 UAE nationals are to be sent for up to two years’ training with SR Technics, as well as taking up internships at OEMs like Airbus.

On the military side, the Abu Dhabi-based Advanced Military Maintenance, Repair and Overhaul Center (AMMROC) is jointly owned with both Lockheed Martin and Sikorsky. It has been servicing Tristar and C-130 aircraft in the region and intends eventually to provide depot-level support for militaries in the region–namely, providing the sort of integrated support system that would be available to them in the U.S.

The group’s next goal in the MRO market is to establish a presence in the Asian or U.S. markets, which Al Shemmari indicated could be achieved through another partnership.

Separately, Mubadala Aerospace owns the Horizon International Flight Academy based at Al Ain International Airport. It was the first flight school in the Middle East approved to train pilots to European requirements.

Despite Mubadala’s deep pockets, the group is far from oblivious to turbulence buffeting the global economy. Though overall revenues continued to grow in 2010, the group struggled somewhat to maintain levels of profitability. Results for the first half of 2011, announced at the end of September, indicate that efforts to bolster the bottom line are working. For the first six months of this year, Mubadala achieved an AED 198 million ($53.5 million) profit, by contrast with an AED 4.4 billion ($1.2 billion) loss in the same period of 2010. Revenues for the first half of 2011 climbed 70 percent to AED 13.6 billion ($3.7 billion).

“The impact of the financial crisis has made us a little bit more cautious and we have been focused on getting any fat out of the operational companies and making sure that the objectives are harmonized,” Al Shemmari told AIN. “We will continue the diversification and hopefully will see its completion by the middle of 2013. Nothing has changed in the strategy and the vision we have extends right through to 2030.”

But the partnerships Mubadala has forged with leading OEMs like Lockheed Martin are not first and foremost about the UAE group’s long-term goals. In Al Shemmari’s view, partners have been attracted to the UAE not only to get close to a significant customer base but also of factors such as its firm laws on intellectual property protection (differentiating from China, for instance), a currency pegged to the U.S. dollar and a union-free work environment.

“What we have done for Abu Dhabi may not work for others,” concluded Al Shemmari. “For instance, Saudi Arabia has more people so it may need a different focus in terms of work that requires a larger workforce. But there are opportunities for others in the region. For instance, no one [in the Middle East] has got into avionics yet–maybe Bahrain could try that–and there is room for others from this region [to develop in aerospace].”